Highlights:

• On 19 May 2014, the PRC State Administration of Foreign Exchange (“SAFE”) introduced a more streamlined administrative regime for the giving of cross-border security.
• The validity of any cross-border security agreement is no longer subject to the prior approval, registration, and filing with SAFE, as well as other SAFE administrative requirements.
• For certain types of securities, the security agreement must be registered with SAFE after execution. In some cases, registration/filing whether pre- or post-execution, is not required.
• Banking and non-banking financial institutions in the PRC may provide cross-border security under a NBWD structure so long as they have been approved to engage in the business of providing security.

Main Article:
On 19 May 2014, the PRC State Administration of Foreign Exchange (“SAFE”) promulgated the Notice Regarding Administration of Foreign Exchange for Cross- Border Security (Hui Fa [2014] No. 29) (“Notice 29”). Notice 29 introduced a more streamlined administrative regime for the giving of cross-border security, and came into force on 1 June 2014.

It also annulled 12 existing regulations issued by SAFE, including:

• the Implementation Measures on the Administration of External Security Provided by Onshore Entities ([97] Hui Zheng Fa Zhi No. 10); and
• the Circular on Issues Concerning the Administration of External Security Provided by Onshore Entities (Hui Fa [2010] No. 39).

Executive Summary of Notice 29

Three categories of cross-border security

Regulatory requirements differ according to the type of cross- border security, of which there are three categories:

• The security provider is a PRC entity, and the lender and the borrower are non-PRC entities (“Nei Bao Wai Dai” or “NBWD”);
• The security provider is a non-PRC entity, and the lender and the borrower are PRC entities (“Wai Bao Nei Dai” or “WBND”); and
• Any other type of cross-border security structure (for example, the security provider and the borrower are PRC entities and the lender is a non-PRC entity).

Salient provisions of Notice 29

The salient provisions of Notice 29 are summarised as follows:

•  The validity of any cross-border security agreement is no longer subject to the prior approval, registration, and filing with SAFE, as well as other SAFE administrative requirements.
• The previous system of pre-approved annual quotas by SAFE for NBWD and WBND has been removed.
• For NBWD and WBND, the security agreement must be registered with SAFE after execution. For other types of cross-border security structures, registration / filing whether pre- or post-execution, is generally not required.
• Other than certain specified cases, such as offshore bond issues, the previous requirement for an affiliated relationship between the security provider and the borrower, as well as the asset to debt ratio requirement imposed on the borrower have been abolished.
• Individuals have been expressly permitted to be security providers for a NBWD structure. This arrangement will be regulated by reference to the rules applicable to non- banking institutions.
• SAFE approval for the enforcement of security is abolished.

Nei Bao Wai Dai
Banking and non-banking financial institutions may provide cross- border security under a NBWD structure so long as they have been approved to engage in the business of providing security. This requirement does not apply to non-financial institutions.

SAFE approval not required

The security agreement may be executed without having to obtain prior approval from SAFE. However, it must be registered post-execution.

Restrictions on fund use

Funds borrowed pursuant to the offshore loan agreement may only be used for the borrower’s normal business operations. In addition, the funds cannot be repatriated back to China by way of loan, equity investment or securities investment, or by any other means, whether directly or indirectly unless specifically approved by SAFE.

Enforcement of the security

Upon the enforcement of the security, a foreign debt arises by way of subrogation as between the PRC security provider and the non-PRC borrower. This foreign debt claim must be registered with SAFE. In addition, until and unless the non-PRC borrower has discharged this foreign debt claim owed to the security provider, the security provider cannot enter into any additional new NBWD cross-border security transactions without SAFE’s approval.

Wai Bao Nei Dai

Requirements for WBND transactions

Subject to the following requirements (applicable to banking and non-banking financial institutions as well as non-financial institutions), a WBND cross-border security agreement may be entered into without prior SAFE approval:

•  The borrower must be a non-financial institution registered and operating in China;
• The lender must be a financial institution registered and operating in China;
• The secured loan must be a loan (in RMB or a foreign currency) extended or committed by a financial institution in China (excluding entrustment loans); and
• The security arrangement must be in line with applicable PRC and offshore laws.

Lifting of certain prior requirements

PRC domestic-funded entities are no longer subject to the WBND quotas and Foreign Invested Enterprises are not subject to the borrowing gap (between the total investment and the registered capital) when accepting offshore security. The PRC lender must report the WBND data to SAFE via the capital account information system.

Enforcement of the security

Upon enforcement of the NBWD security, the PRC lender (i.e., the financial institution) may receive the proceeds from the enforcement directly from the non-PRC security provider. As the enforcement of the security will give rise to a foreign debt owed by the PRC borrower to the non-PRC security provider, the borrower will need to register and file this foreign debt with SAFE. SAFE will check compliance on the WBND upon registration.